OVERVIEW ON MICRO FINANCE

 

1. Introduction

 

Micro finance refers to host of financial services-savings, loans and other financial products that are available to the economically lower strata of the society. Micro finance also referred to as “banking for the poor”

 

 The concept of Micro finance is not new. Numerous traditional and informal systems of credit have existed in developing economics for centuries. The latest developments have resulted in integration of traditional financial systems with modern banking. Earlier, microfinance was a means of proving very poor families with very small loans (micro credit) to help them in engage in productive activities. Overtime, micro finance has come to include a broader range of services (credit, savings, insurance etc).

 

Developing economies have recognized micro finance as an enabling and empowering tool for poverty alleviation and economical empowerment of the needy. Microfinance has now become an essential ingredient in the development process of nation.

 

2. Definition of Micro Finance:

Microfinance” is often defined as financial services for poor and low-income clients. In practice, the term is often used more narrowly to refer to loans and other services from providers that identify themselves as “microfinance institutions” (MFIs). These institutions commonly tend to use new methods developed over the last 30 years to deliver very small loans to unsalaried borrowers, taking little or no collateral. These methods include group lending and liability, pre-loan savings requirements, gradually increasing loan sizes, and an implicit guarantee of ready access to future loans if present loans are repaid fully and promptly.

 

More broadly, microfinance refers to a movement that envisions a world in which low-income households have permanent access to a range of high quality financial services to finance their income-producing activities, build assets, stabilize consumption, and protect against risks. These services are not limited to credit, but include savings, insurance, and money transfers.

 

 “Micro finance as provision of thrift, credit and other financial services and product of very small amount to the poor in rural , semi urban and urban areas for enabling them to raise their income levels and improving living standards”- The Reserve Bank of India

 

The micro credit Summit 2007 defines micro credit as the extension of small loans to entrepreneurs too poor to qualify for traditional bank loans

 

 3. Evolution of Microfinance in India:

 

•          Microfinance has been in practice for ages ( though informally).

•          Legal framework for establishing the co-operative movement set up in 1904.

•          Reserve Bank of India Act, 1934 provided for the establishment of the Agricultural Credit Department.

•          Nationalization of banks in 1969

•          Regional Rural Banks created in 1975.

•          NABARD established as an apex agency for rural finance in 1982.

•          Passing of Mutually Aided Co-op. Act in AP in 1995.

 

4. The Profile of Microfinance in India

 

• 50% Indians living Below Poverty Line as per Times of India 2 July 2009
• Annual credit demand by the poor in the country is estimated to be about Rs. 60,000 crores.
• Cumulative disbursements under all microfinance programmes is only about Rs. 5000 crores.(Mar. 04)
• Total outstanding of all microfinance initiatives in India estimated to be Rs. 1600 crores. (March 04)
• Only about 5 % of rural poor have access to microfinance.
• Though a cumulative of about 20 million families have accessed microfinance to the extent of Rs. 5000 crores, the total outstanding is estimated to be only about Rs. 1600 crores. The active borrowers are estimated to have a per capita outstanding of only Rs. 2500.
• India’s bank SHG link programme is now the biggest in the world
• According to RBI Annual Report 2005-2006, the cumulative number of SHGs linked to Banks stood at 2.2 million with total bank credit to these SHGs Rs.113980 million
• 33 Million Women have reportedly formed 2.2 million small business by March 2007 as per NABARD.

5. Status of Micro Finance in India

 

Considerable gap between demand and supply for all financial services, Majority of poor are excluded from financial services. This is due to, inter-alia, the following reasons

1. Bankers feel that it is fraught with risks and uncertainties.
2. High transaction costs
3. Unfavourable policies like caps on interest rates which effectively limits the viability of serving the poor.

 While MFIs have shown that serving the poor is not an unviable proposition there are issues that have constrained MFIs while scaling up. These include

1. Lack of an appropriate legal vehicle
2. Limited access to equity
3. Difficulty in accessing low cost on-lending funds (as of now they are unable to offer savings services in a legitimate manner.
4. Limited access to Capacity Building support which is an important variable in terms of quality of the portfolio, MIS, and the sustainability of operations.
5. About 56 % of the poor still borrow from informal sources.
6. 70 % of the rural poor do not have a deposit account
7. 87 % have no access to credit from formal sources.
8. Less than 15 % of the households have any kind of insurance.
9. Negligible numbers have access to health insurance (0.4 %) and crop insurance (0.2 %).

 6. Features of Indian Micro Finance

 

•          About 60 % of the MFIs are registered as societies.

•          About 20 % are Trusts

•          About 65 % of the MFIs follow the operating model of SHGs.

•          Large concentration in South India

•          600 MFI initiatives have a cumulative outreach of 1.25 crore poor households

 

7. An overview of the Micro finance Landscape

 

It is predicated that over 500 million poor people world wide demand financial services and the present Micro Finance Institutions ( MFI) can serve only a fraction- about 16 million. This huge gap has necessitated the development of micro finance as a global industry.

 

• Many significant changes are being witnessed in the concepts, vision and practice of micro finance the world over. The vision of microfinance has changed from “provision of credit to “permanent access to financial services.
• The emergence of microfinance as a global industry has marked the beginning of convergence between the business and social objectives.
• MFIs can broadly be categorized as :

-Not for Profit MFIs: These include Societies, Public Trusts and Non Profit companies.

-For Profit MFIs : Bodies like Non Banking Financial Companies and Banks which provide microfinance along with their other usual banking services.

 

8. Need of mainstreaming the Microfinance Industry:

 

There is an increasing the need of mainstreaming microfinance today. MFIs need to be come self sufficient and attain financial sustainability by leveraging technology and other management tools. Regulatory issues also have to be addressed in order to attract funds from domestic and international capital markets.

 

Second tier institutions, like donor agencies, international NGOs and multilateral institutions have played an important role mainstreaming microfinance institutions. They not supported MFIs financially but also helped in instituting capacity building and good governance practices in the MFIs.

 

Example:

 

• The formation of CGAP in 1995 in the form of group of donor agencies including World Bank played an important role in developing a common language for micro finance and catalyzing the move towards best practices standards. The Consultative Group to Assist the Poor (CGAP) is a consortium of 33 public and private development agencies working together to expand access to financial services for the poor in developing countries.

 

• The establishment of MIX( Microfinance Information Exchange) in June 2002, USA was also a milestone in the microfinance industry. MIX aims to promote information exchange in the microfinance industry.

 Sa-Dhan was founded as the Association of Community Development Finance Institutions by SEWA Bank, BASIX, Dhan Foundation, FWWB, MYRADA, RGVN, SHARE and PRADAN in 1999.mission is to build the field of community development finance in India to help its member and associate institutions to better serve low-income households, particularly women, in both rural and urban India, in their quest for establishing stable livelihoods and improving quality of life. 

 

9. Challenges and Opportunities in Microfinance:

Microfinance institutions still face numerous challenges in various forms.

 

• Most critical among these is high operating costs. To sustain in the competitive environment, it is essential that MFIs deliver their services at least cost while maintaining quality and operating profitability.
• As more players enter the market, MFIs need to also concentrate on improving their operational performance while focusing on customer satisfaction.
• Client out reach by 40% as per 2007-2008. There is ample scope for further growth.
• According to McKinsey India Survey (April 2006), rural India has the potential to become a US$ 500 billion market by year 2020.
• One of the main concerns that face the micro finance sector is the availability of skilled human resources. But, looking at the tremendous growth opportunities, it is estimated that a minimum of 20000 middle level managers,150,000 loan officers   are required to staff the MFIs in India over 5 to 10 years to serve 50 million clients (As per BASIX Data)

 10. Conclusion:

 

Poverty is a very complicated issue, and many different approaches and tools are required to address it. Microfinance is one tool that is appropriate for millions of the working poor to lift themselves out of poverty. However, microfinance is not the only answer, and in fact is not always appropriate. For instance for the extreme poor, or those who are sick and/or unable to work, microfinance may not be an appropriate tool.Though still in the initial phases of development, the micro finance sector has been successful in creating impact across the world. It has been recognized as an important phenomenon in the process of development especially in context of Globalization